The key is to avoid any more debt mistakes, as you embark on solving and beginning to repay any debts you have. If you are not careful, you could end up deeper in debt.
Yes, more debt mistakes can happen to you, but mostly due to lack of proper planning and knowledge.
However, don’t get scared! To get out of this debt misery, you first have to identify the mistakes and then use your head to find out the solution.
Confused? Let me help you with that. If you’re ready to face your fears and get rid of your ever-growing debts, make sure you recognize and avoid these debt mistakes so it doesn’t snowball further.
1. Not creating a proper budget
People normally fall into debt when they spend more than they can afford to pay. Keeping track of our money can be simple, but most of us don’t think it matters or have time to do so.
Your income and expenses can both help you to keep a balance in life.
But to keep them both balancing, you need to have a budget. If you don’t take it seriously, you won’t see any improvement in your financial life and you’ll drown into debt very soon.
Solution: First, start tracking your expenses. Prepare a list of the expenses which you’ll be tracking. Determine your expenses and create a budget. Your budget should meet your “needs” first, then the “wants” that you can afford.
- Your expenses should be less than or equal to your total income.
- Save as much as possible for you and invest the money to pay off your debts.
- Create an emergency savings fund big enough to meet 3 to 6 months of your total living expenses.
Related: The Number One Reason Most People Are Broke Or Have No Emergency Fund
2. Ignoring the root cause of your debt
Have you ever tried to find out the root cause of your debt mistakes? According to the experts, most of the debt issues are generally caused by these reasons:
- Unemployment but no change in spending habits.
- An unexpected surge of expenses like travel for family issues, vet bills for your pets, car overhauling bills, etc.
- Bill reimbursement costs that can’t be added to the bill.The tendency to lead a luxurious life with unusual spending habit.
Solution: Before finding a permanent solution to your debt problems, you should always find out the reasons for your misery. As you might have started tracking your expenses, prepare a list and find out which of the expenses are costing you more and increasing your total debts.
As soon as you spot the reasons, start working on a solution to resolve those reasons. This way you can avoid incurring further debts.
For example – If sudden unemployment has pushed you into debt problems a few days back, then as soon as you get a new job, also start working on an alternate income source like a part-time job, teaching, writing, or others.
This way you can create a backup income source for helping you if a sudden job loss happens again in the future.
3. Getting too many credit cards
Credit card offers are very tempting, isn’t it? It feels good when you are getting those free tickets, free miles or 10,000 points after spending $5,000 in the initial months. It looks pretty much awesome, right?
Yes, it is awesome, but for the credit card companies. Most of the people spend too much to get those offers and discounts, thinking that they’ll pay off the credit card bills with a snap of their fingers. But, practically, this is how people fall into credit card debts.
A national survey conducted by finrafoundation.org in 2009 revealed that 46% of US citizens (adults between the ages of 18 to 29) had credit card dues since 2008, and 29% of them managed to pay only the minimum payments that year.
The basic thing is that people don’t have the proper discipline to manage credit cards. So, as a result, they rack up the charges day by day. That balance gradually grows as people continue using their credit cards for buying things.
Solution: Do not apply for too many credit cards at a time. Even if you have multiple cards, don’t use all of them for making purchases. Try to pay off your credit card bills in full and within due date. If you can’t afford to pay the bills altogether, you can try some DIY debt repayment methods like debt snowball or debt avalanche method to eliminate credit card debts.
A word of advice…
If you are still having trouble with managing credit card bills, try to follow these steps:
- Check your budget
- Avoid using credit cards further
- Prepare a list before shopping
- Don’t use it if you don’t have the cash to purchase
Of course, emergencies happen and you may need to charge something expensive on your credit card. Just ensure you stop using it until it is paid.
A big debt mistake people make is to continue charging the card and only pay the monthly minimum. You’ll be destroyed by interest and be wasting money in the long-term.
4. Trying to tackle the debt alone
People normally restrain themselves to discuss their debt problems with anyone else. They even hesitate to involve their friends and family for dealing with debts.
While understandable, this is something you might not want to avoid. Financial problems usually can be solved if you get good advice from your close ones.
They even help you to get out of these debt issues by providing monetary help along with other remedies. So, if you are one of those people who doesn’t want to be open with their debt, you can be making one of the most foolish debt mistakes of all.
Solution: Take suggestions from your relatives and friends. You may even ask for personal loans from them. However, don’t take advantage of their help if you ask for it either.
On the other hand, you may ask help from a non-profit credit counseling agency and get debt help from trained and certified professionals.
They can provide you with debt relief options like a debt settlement program, credit card debt consolidation program or a debt management program. Discuss your problems with them and choose the best way to eliminate your debts.
5. Closing accounts after they are paid off
After choosing the best debt repayment option, you may pay off most of your credit accounts. But if you are thinking about closing those paid off credit accounts, that would be one of your great debt mistake.
The credit scoring system depends on various factors. Your available credit and long credit history are two of the most important of those factors. Once your accounts are paid off, your credit limit will increase automatically.
Having a good credit available in your account reflects a positive impact and can improve your score. Apart from that, if those accounts are quite old and have a decent payment history, it’ll also give your score a big lift. So, if you are about to close those accounts, your credit score might get a blow.
Solution: The solution is simple. Pay off the account, but don’t immediately close it. If you feel strongly about closing it, wait for a few months or more then consider it.
If you want to be successful with your debt payoff plans, you should always prepare a to-do list to start with. Calculate how much you can afford in a month to pay off your debts, then allocate that money to pay off your multiple bills.
It’ll be a wise decision if you can consolidate your unsecured debts through a suitable debt consolidation method. However, you should know the best way to consolidate credit card debt as per your financial condition. Then only, you’ll be successful in getting rid of debts completely.
Getting out of debt can be possible if you avoid the common mistakes discussed above.
It doesn’t matter if you’ve made several of these mistakes already. You still have the time to get started and correct any debt mistakes you’ve made.
This above guest post comes from Good Nelly, a financial writer who lives in Milwaukee, Wisconsin. She started her financial journey in 2007 and has been associated with DebtConsolidationCare for 9 years. Through her